The“First” Imperfect Competition Revolution

Abstract

Imperfections and frictions in the workings of the forces of competition, such as institutional arrangements or monopolistic elements, have always been recognised by economists when representing market mechanisms. However, it was believed that rigidities in the market mechanism did not seriously impede the working of competition and it was therefore reasonable to make the general assumption of or pure competition in the theory of markets, as a tolerably close approximation to the real world. In the 1920s and 1930s a wave of research gathered from the opposite presumption, namely that the perfect competition assumption lacked realism, drawing attention towards market features and other forms of competition, and specific apparatus to deal with them was sought after. While Marshall and Pigou certainly contain some loose hints to the middle ground between monopoly and competition it was the new generation of Cambridge economists who cultivated the research ground. The path-breaking insights by Sraffa, the building up of a theoretical system by Kahn and Robinson and the extension of market imperfection to macroeconomics by Kalecki constitute the major achievements in the Cambridge (UK) tradition. On the other side of the Atlantic, in Cambridge, Mass., Chamberlin and Triffin, developed a system of thought featuring market competition based on strategic interdependence among sellers and product differentiation. While sharing with the other Cambridge authors mistrust in the perfect competition assumption, they were not ingrained in the Marshallian tradition and drew their inspiration from different sources. By the early 1950s the imperfect competition revolution came under attack both by the Chicago school, reinstating free market approach both to micro and macro issues. It was only in the 1980s that a second imperfect competition revolution took place, in reaction to the pervasiveness of free competition assumption and in the attempt to give microeconomic foundation to the Keynesian approach to market failures. A and rich literature, based on various types of imperfections and rigidities, has developed over the last twenty years, once again challenging the wisdom that competition could be treated in general as perfect. This paper examines the development of the first imperfect competition revolution in the two Cambridges, briefly reviewing the work of the authors who were the major protagonists of a change in the economic representation of market mechanisms, concluding with some thoughts on its legacy after the highs and lows of its fortune.